ASSOCIATED CAPITAL GROUP, INC. Introduction
MD&A is provided as a supplement to, and should be read in conjunction with, the Company's unaudited interim consolidated financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q, as well as the Company's audited annual financial statements included in our Form 10-K filed with theSEC onMarch 17, 2022 to help provide an understanding of our financial condition, changes in financial condition and results of operations. Unless the context otherwise requires, all references to "we," "us," "our," "AC Group " or the "Company" refer collectively toAssociated Capital Group, Inc. , a holding company, and its subsidiaries through which our operations are actually conducted. Overview We are aDelaware corporation, incorporated in 2015, that provides alternative investment management services and operates a direct investment business that over time invests in businesses that fit our criteria. Additionally, we derive income from proprietary investments.
We conduct our investment management activities through our wholly-owned subsidiaryGabelli & Company Investment Advisers, Inc. ("GCIA") and its wholly-owned subsidiary,Gabelli & Partners, LLC ("Gabelli & Partners "). GCIA is an investment adviser registered with theSecurities and Exchange Commission ("SEC") under the Investment Advisers Act of 1940, as amended (the "Advisers Act").GCIA and Gabelli & Partners together serve as general partners or investment managers to investment funds including limited partnerships and offshore companies (collectively, "Investment Partnerships"), and separate accounts. We primarily manage assets across a range of risk and event arbitrage portfolios and in equity event-driven value strategies. The business earns management and incentive fees from its advisory activities. Management fees are largely based on a percentage of assets under management ("AUM"). Incentive fees are based on a percentage of the investment returns of certain client portfolios. We manage assets on a discretionary basis and invest in a variety ofU.S. and foreign securities mainly in the developed global markets. We primarily employ absolute return strategies with the objective of generating positive returns. We serve a wide variety of investors globally including private wealth management clients, corporations, corporate pension and profit-sharing plans, foundations and endowments, as well as serving as sub-advisor to certain third-party investment funds. In merger arbitrage, the goal is to earn absolute positive returns. We introduced our first limited partnership, Gabelli Arbitrage (renamedGabelli Associates ), inFebruary 1985 . Our typical investment process begins at the time of deal announcement, buying shares of the target at a discount to the stated deal terms, earning the spread until the deal closes, and reinvesting the proceeds in new deals in a similar manner. By owning a diversified portfolio of transactions, we mitigate the adverse impact of singular deal-specific risks. As the business and investor base expanded, we launched an offshore version in 1989. Building on our strengths in global event-driven value investing, several investment vehicles have been added to balance investors' geographic, strategic and sector-specific needs. Today, we manage investments in multiple categories, including merger arbitrage, event-driven value and other strategies.Proprietary Capital Proprietary capital is earmarked for our direct investment business that invests in new and existing businesses, using a variety of techniques and structures. We launched our direct private equity and merchant banking activities inAugust 2017 . The direct investment business is developing along three core pillars:
?
million of authorized capital as a "fundless" sponsor.
? Gabelli Special Purpose Acquisition Vehicles ("SPAC"), which commenced in 2018
with the launch of the
(VALU) that was listed on the
segment. On
initial public offering of its special purpose acquisition corporation
("SPAC"), PMV Consumer Acquisition Corp. (NYSE:PMVC). PMV Consumer Acquisition
Corp. ("PMV") was created to pursue an initial business combination with
companies within the global consumer industry having an enterprise valuation
in the range of
? Finally,
strategic operating initiatives broadly.
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Our direct investing efforts are organized to invest in various ways, including growth capital, leveraged buyouts and restructurings, with an emphasis on small and mid-sized companies. Our investment sourcing is across a variety of channels including direct owners, private equity funds, classic agents, and corporate carve outs (which are positioned for accelerated growth, as businesses seek to enhance shareholder value through financial engineering). The Company's direct investing vehicles allow us to acquire companies and create long-term value with no pre-determined exit timetable. TheSPAC vehicles leverage our capital markets expertise and act to expand deal flow in target industries. We have a proprietary portfolio of cash and investments which we expect to use to invest primarily in funds that we will manage, provide seed capital for new products, including SPACs that we or our affiliates sponsor, expand our geographic presence, develop new markets and pursue strategic acquisitions and alliances. A novel strain of coronavirus, and its variants, ("COVID-19") continue to disrupt global supply chains, adding broad inflationary pressures impacting companies worldwide. As a result of this pandemic, many of our employees ("teammates") were working remotely. The Company's remote work arrangements were mostly discontinued as ofJuly 2021 and a majority of our teammates are now back in our offices. Furthermore, in response to the invasion ofUkraine byRussia , economic sanctions were imposed on individuals and entities withinRussia by governments around the world, including theU.S. and theEuropean Union . The resulting economic dislocations from the pandemic and theUkraine -Russia conflict did not have a significant adverse impact on our AUM. There continues to be no material impact of remote work arrangements on our operations, including our financial reporting systems, internal control over financial reporting, and disclosure controls and procedures, and there has been no material challenge in implementing our business continuity plan. Financial Highlights
The following is a summary of the Company's financial performance for the
quarters ended
($000s except per share data or as noted)
Second Quarter
2022 2021
AUM - end of period (in millions)
1,851 1,570
Net income/(loss) per share-diluted
Condensed Consolidated Statements of Income
Investment advisory and incentive fees, which are based on the amount and composition of AUM in our funds and accounts, represent our largest source of revenues. Growth in revenues depends on good investment performance, which influences the value of existing AUM as well as contributes to higher investment and lower redemption rates and attracts additional investors while maintaining current fee levels. Growth in AUM is also dependent on being able to access various distribution channels, which is usually based on several factors, including performance and service. In light of the ongoing dynamics created by rising interest rates, high inflation, geo-political conflict, COVID-19 and the related impact on the global supply chain and banks, oil, travel and leisure, we could experience higher volatility in short term returns of our funds. Incentive fees generally consist of an incentive allocation on the absolute gain in a portfolio generally equating to 20% of the economic profit, as defined in the agreements governing the investment vehicle or account. We recognize such revenue only when the measurement period has been completed generally in December or at the time of an investor redemption.
Compensation includes variable and fixed compensation and related expenses paid to officers, portfolio managers, sales, trading, research and all other professional staff. Variable compensation is paid to sales personnel and portfolio management and may represent up to 55% of revenues.
Management fee expense is incentive-based compensation equal to 10% of adjusted aggregate pre-tax profits paid to the Executive Chair or his designees for his services pursuant to an employment agreement.
Other operating expenses include general and administrative operating costs.
Other income and expense includes net gains and losses from investments (which
include both realized and unrealized gains and losses from securities and equity
in earnings of investments in partnerships), interest and dividend income, and
interest expense. Net gains and losses from investments are derived from our
proprietary investment portfolio consisting of various public and private
investments and from consolidated investment funds.
Net income/(loss) attributable to noncontrolling interests represents the share
of net income attributable to third-party limited partners of certain
partnerships and offshore funds we consolidate. Please refer to Notes A and D in
our consolidated financial statements included elsewhere in this report.
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Condensed Consolidated Statements of Financial Condition
We ended the second quarter of 2022 with approximately$885 million in cash and investments, net of securities sold, not yet purchased of$4 million . This includes$344 million of cash and cash equivalents;$25 million of short-termU.S. Treasury obligations;$244 million of securities, net of securities sold, not yet purchased, including shares of GAMCO with a market value of$50.5 million ; and$271 million invested in affiliated and third-party funds and partnerships, including investments in affiliated closed end funds which have a value of$59 million and more limited liquidity. Our financial resources provide flexibility to pursue strategic objectives that may include acquisitions, lift-outs, seeding new investment strategies, and co-investing, as well as shareholder compensation in the form of share repurchases and dividends. Total shareholders' equity was$887 million or$40.30 per share as ofJune 30, 2022 , compared to$937 million or$42.48 per share as ofDecember 31, 2021 . Shareholders' equity per share is calculated by dividing the total equity by the number of common shares outstanding. The decrease in equity from the end of 2021 was largely attributable to loss for the year to date period. 22
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RESULTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Revenues
Investment advisory and incentive fees $ 2,451 $ 2,388 $ 4,937 $ 4,613
Other revenues 95 101 191 201
Total revenues 2,546 2,489 5,128 4,814
Expenses
Compensation 3,007 5,023 6,940 8,891
Management fee - 4,320 - 6,983
Other operating expenses 1,750 3,557 3,705 5,716
Total expenses 4,757 12,900 10,645 21,590
Operating loss (2,211 ) (10,411 ) (5,517 ) (16,776 )
Other income/(loss)
Net gain/(loss) from investments (37,803 ) 42,306 (53,413 ) 73,627
Interest and dividend income 1,932 6,811 2,736 8,000
Interest expense (46 ) (63 ) (79 ) (154 )
Shareholder-designated contribution - (439 ) (208 ) (2,176 )
Total other income/(loss), net (35,917 ) 48,615 (50,964 ) 79,297
Income/(loss) before income taxes (38,128 ) 38,204 (56,481 ) 62,521
Income tax expense/(benefit) (8,036 ) 9,020 (12,884 ) 14,610
Income/(loss) before noncontrolling
interests (30,092 ) 29,184 (43,597 ) 47,911
Income/(loss) attributable to
noncontrolling interests (205 ) (532 ) 2,476 (360 )
Net income/(loss) attributable to
Associated Capital Group, Inc.'s
shareholders $ (29,887 ) $ 29,716 $
(46,073 )
Net income/(loss) per share attributable toAssociated Capital Group, Inc.'s shareholders: Basic$ (1.36 ) $ 1.34 $ (2.09 ) $ 2.18 Diluted$ (1.36 ) $ 1.34 $ (2.09 ) $ 2.18 Weighted average shares outstanding: Basic 22,036 22,118 22,045 22,169 Diluted 22,036 22,118 22,045 22,169 23
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Three Months Ended
Overview Our operating loss for the quarter was$2.2 million compared to$10.4 million for the comparable quarter of 2021. The decrease in operating loss was driven primarily by no management fee expense, lower compensation accruals and lower mark to market expense on stock-based compensation in the 2022 quarter. Other income/(loss), net was a loss of$35.9 million in the 2022 quarter compared to a gain of$48.6 million in the prior year's quarter primarily due to mark-to-market changes in our holdings of public investments and our investments in various partnerships. The Company recorded an income tax benefit in the current quarter of$8.0 million compared to expense of$9.0 million in the prior year's quarter. Consequently, our current quarter net income/(loss) was$(29.9) million , or$(1.36) per diluted share, compared to net income of$29.7 million , or$1.34 per diluted share, in the prior year's comparable quarter. Revenues
Total revenues were
We earn advisory fees based on the average level of AUM in our products. Advisory and incentive fees were$2.5 million for 2022,$0.1 million higher than the comparable quarter of 2021. AUM of$1.8 billion was 11.9% higher than the prior year quarter. Incentive fees are not recognized until the uncertainty surrounding the amount of variable consideration ends and the fee is crystalized, typically on an annual basis onDecember 31 . There were no unrecognized incentive fees for the quarter endedJune 30, 2022 compared to$5.3 million for the quarter endedJune 30, 2021 . Expenses Compensation, which include variable compensation, salaries, bonuses and benefits, was$3.0 million and$5.0 million for the three month periods endedJune 30, 2022 andJune 30, 2021 , respectively. Fixed compensation, which includes salaries and benefits and stock based compensation, decreased to$2.1 million for the 2022 period from$2.5 million in the prior year, driven primarily by mark to market changes on stock based compensation due to a decline in AC's stock price in 2022. For the three months endedJune 30, 2022 and 2021, stock-based compensation was a credit of$(0.1) million and expense of$0.5 million , respectively. Discretionary bonus accruals were$0.7 million and$0.5 million in the 2022 and 2021 periods, respectively. The remainder of the compensation expense represents variable compensation that fluctuates with management fee and incentive allocation revenues and gains on investment portfolios. Variable payouts as a percent of revenues are impacted by the mix of products upon which performance fees are earned and the extent to which they may exceed their allocated costs. For 2022, these variable payouts were$0.9 million , a decrease from$2.6 million accrued in 2021 driven by performance in 2022. Management fee expense represents incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is payable toMario J. Gabelli pursuant to his employment agreement. No management fee expense was recorded for the three-month period endedJune 30, 2022 due to the year to date pre-tax loss. AC recorded management fee expense of$4.3 million for the three-month period endedJune 30, 2021 .
Other operating expenses were
Other Net gain/(loss) from investments is primarily related to the performance of our securities portfolio and investments in partnerships. Investment gains/(losses) were$(37.8) million in the 2022 quarter versus$42.3 million in the comparable 2021 quarter, the decrease driven by continued market uncertainty in Q2 2022 resulting from rising interest rates, high inflation and also geo-political conflict, amongst other factors. Interest and dividend income decreased to$1.9 million in the 2022 quarter from$6.8 million in the 2021 quarter primarily due to the special dividend declared on our holdings of GAMCO in the 2021 quarter.
There were no Shareholder-designated contributions in the 2022 quarter compared
to
Income taxes Our provision for income taxes was a benefit of$8.0 million for the quarter compared to expense of$9.0 million in the comparable period of 2021, primarily driven by losses in the 2022 period. The effective tax rate for the three months endedJune 30, 2022 andJune 30, 2021 was 21.1% and 23.6%, respectively. 24
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Six Months Ended
Overview Our operating loss for the year to date period was$5.5 million compared to$16.8 million for the comparable period of 2021. The decrease in operating loss was driven primarily by no management fee expense, lower compensation accruals and lower mark to market expense on stock-based compensation in the 2022 year to date period. Other income/(loss), net was a loss of$51.0 million in the 2022 period compared to a gain of$79.3 million in the prior year's period primarily due to mark-to-market changes in our holdings of public investments and our investments in various partnerships. The Company recorded an income tax benefit in the current period of$12.9 million compared to expense of$14.6 million in the prior year's period. Consequently, our current period net income/(loss) was$(46.1) million , or$(2.09) per diluted share, compared to net income of$48.3 million , or$2.18 per diluted share, in the prior year's comparable period. Revenues
Total revenues were
We earn advisory fees based on the average level of AUM in our products.
Advisory fees were
Expenses Compensation, which include variable compensation, salaries, bonuses and benefits, was$6.9 million for the six months endedJune 30, 2022 ,$2.0 million lower than the$8.9 million for the six months endedJune 30, 2021 . Fixed compensation, which includes salaries and benefits and stock based compensation, decreased to$5.1 million for the 2022 period from$5.2 million in the prior year. For the six months endedJune 30, 2022 , stock-based compensation was$0.3 million compared to$0.9 million for the six months endedJune 30, 2021 , the decrease was driven by a decline in AC's stock price in the 2022 period. Discretionary bonus accruals were$1.4 million and$1.1 million in the 2022 and 2021 periods, respectively. The remainder of the compensation expense represents variable compensation that fluctuates with management fee and incentive allocation revenues and gains on investment portfolios. Variable payouts as a percent of revenues are impacted by the mix of products upon which performance fees are earned and the extent to which they may exceed their allocated costs. For 2022, these variable payouts were$1.8 million , down$1.9 million from$3.7 million in 2021 due to performance in 2022. Management fee expense represents incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is payable toMario J. Gabelli pursuant to his employment agreement. No management fee expense was recorded for the six-month period endedJune 30, 2022 due to the year to date pre-tax loss. AC recorded management fee expense of$7.0 million for the six-month period endedJune 30, 2021 .
Other operating expenses were
Other Net gain/(loss) from investments is primarily related to the performance of our securities portfolio and investments in partnerships. Investment gains/(losses) were$(53.4) million in the 2022 period versus$73.6 million in the comparable 2021 period, the decrease driven by continued market uncertainty in 2022.
Interest and dividend income decreased to
Shareholder-designated contributions were
Income taxes Our provision for income taxes was a benefit of$12.9 million for the period compared to expense of$14.6 million in the comparable period of 2021, primarily driven by losses in the 2022 period. The effective tax rate for the six months endedJune 30, 2022 andJune 30, 2021 was 22.8% and 23.3%, respectively. 25
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Table of Contents ASSETS UNDER MANAGEMENT Our revenues are highly correlated to the level of assets under management and fees associated with our various investment products, rather than our own corporate assets. Assets under management, which are directly influenced by the level and changes of the overall equity markets, can also fluctuate through acquisitions, the creation of new products, and the addition of new accounts or the loss of existing accounts. Since various equity products have different fees, changes in our business mix may also affect revenues. At times, the performance of our equity products may differ markedly from popular market indices, and this can also impact our revenues.
Assets under management were
Assets Under Management (in millions)
% Change From
June 30, December 31, June 30, December 31, June 30,
2022 2021 2021 2021 2021
Merger Arbitrage $ 1,591 $ 1,542 $ 1,364 3.2 16.6
Event-Driven Value 174 195 201 (10.8 ) (13.4 )
Other 37 44 46 (15.9 ) (19.6 )
Total AUM $ 1,802 $ 1,781 $ 1,611 1.2 11.9
Fund flows for the three months ended
Market
March 31, Appreciation/ Foreign Net Inflows/ June 30,
2022 (Depreciation) Currency(1) (Outflows) 2022
Merger Arbitrage $ 1,606 $ (44 ) $ (52 ) $ 81 $ 1,591
Event-Driven Value 191 (17 ) - - 174
Other 42 (5 ) - - 37
Total AUM $ 1,839 $ (66 ) $ (52 ) $ 81 $ 1,802 (1) Reflects the impact of currency fluctuations of non-US dollar classes of investment funds.
The majority of our AUM have calendar year-end measurement periods, and our incentive fees are primarily recognized in the fourth quarter. Assets under management decreased on a net basis by$37 million for the quarter endedJune 30, 2022 due to market depreciation of$66 million and the impact of currency fluctuations of non-US dollar classes of investment funds of$52 million , partially offset by net inflows of$81 million .
Liquidity and Capital Resources
Our principal assets consist of cash and cash equivalents; short-term treasury securities; marketable securities, primarily equities, including 2.4 million shares of GAMCO; and interests in affiliated and third-party funds and partnerships. Although Investment Partnerships may be subject to restrictions as to the timing of distributions, the underlying investments of such Investment Partnerships are generally liquid, and the valuations of these products reflect that underlying liquidity.
Summary cash flow data is as follows (in thousands):
Six Months Ended
June 30,
2022 2021
Cash flows provided by (used in):
Operating activities $ 29,272 $ 231,661
Investing activities (2,865 ) 5,602
Financing activities (5,010 ) (7,501 ) Net increase in cash, cash equivalents and restricted cash
21,397 229,762
Cash, cash equivalents and restricted cash at beginning of period
328,594 39,509
Cash, cash equivalents and restricted cash at end of period$ 349,991 $ 269,271 26
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We require relatively low levels of capital expenditures and have a highly variable cost structure where costs increase and decrease based on the level of revenues we receive. Our revenues, in turn, are highly correlated to the level of AUM and to investment performance. We anticipate that our available liquid assets should be sufficient to meet our cash requirements as we build out our operating business. AtJune 30, 2022 , we had cash and cash equivalents of$344.3 million , Investments inU.S. Treasury Bills of$25.0 million and$244.2 million of investments net of securities sold, not yet purchased of$3.6 million . Included in cash and cash equivalents are$1.1 million as ofJune 30, 2022 which were held by consolidated investment funds and may not be readily available for the Company to access. Net cash provided by operating activities was$29.3 million for the six months endedJune 30, 2022 due to$15.0 million of net decreases of securities and net distributions from investment partnerships and$40.3 million of adjustments for noncash items, primarily losses on investments securities and partnership investments and deferred taxes and$17.6 million of net receivables/payables, partially offset by our net loss of$(43.6) million . Net cash used in investing activities was$2.9 million due to purchases of securities of$4.3 million offset by return of capital on securities of$1.3 million . Net cash used in financing activities was$5.0 million resulting from dividends paid of$2.2 million , stock buyback payments of$1.6 million and redemptions of redeemable noncontrolling interests of$1.1 million . Net cash provided by operating activities was$231.7 million for the six months endedJune 30, 2021 due to$251.3 million of net decreases of securities and net contributions to investment partnerships and our net income of$47.9 million , offset by$60 million of adjustments for noncash items, primarily gains on investments securities and partnership investments and deferred taxes and net receivables/payables of$7.5 million . Net cash provided by investing activities was$5.6 million due to purchases of securities of$1.0 million offset by proceeds from sales of securities of$6.4 million and return of capital on securities of$0.2 million . Net cash used in financing activities was$7.5 million resulting from stock buyback payments of$6.1 million and dividends paid of$2.2 million .
Critical Accounting Policies and Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. See Note A and the Company's Critical Accounting Policies in Management's Discussion and Analysis of Financial Condition and Results of Operations in AC's 2021 Annual Report on Form 10-K filed with theSEC onMarch 17, 2022 for details on Critical Accounting Policies.
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